Assessing Affordability
A survey released this year by Bankrate indicates affordability is one of the main obstacles Gen Z and millenials face when trying to purchase a home. Home values skyrocketed throughout the pandemic as people flocked to suburban settings and purchased new properties. Throughout 2020 and 2021, interest rates remained low by historical standards, creating ideal conditions for some buyers in terms of securing an affordable loan.
As rates are on the rise while the Fed looks to combat inflation, mortgage costs now are increasing. For would-be buyers who can’t afford a down payment, or who are unsure about covering monthly payments, now could be the ideal time to start saving.
Give Yourself Some Credit
One of the best actions to take ahead of a major purchase, such as a car or home, is to understand and build your credit score. Lenders look at your credit score to determine creditworthiness, and to evaluate the risk associated with lending money. Typically, a higher credit score means an individual will be able to secure a lower interest rate. Over the life of a loan, this could potentially translate to thousands of dollars in savings.
Working to improve a credit score before applying for a home loan could save a borrower a lot of money in interest over time. Lower rates will keep monthly payments lower or even provide the ability to pay back the loan faster.
Let’s look at an example using a mortgage calculator: If you were take out a mortgage on a $400,000 home after putting 10% down with a 4.5% interest rate on a 30-year fixed rate mortgage, your monthly payment would be $1,824 and you would pay $296,663 total in interest over the life of the loan.
If you were to take out that same loan with a 5.5% rate of interest, your monthly payment would be $2,044 and you’d pay $375,854 total in interest. The difference of 1% in interest results in almost $80,000 paid over time.
How Much, and Where?
Saving money for a house is about more than you might think. It might start with a down payment and closing costs, but it can also include costs like moving expenses, buying new furniture, sprucing up the landscaping, and even that first stock-up trip to the grocery store after you move in.
And while the decision to buy might be easy, the actual buying process can require discipline, mental fortitude, and a lot of stick-to-itiveness.
Here’s some ways you could considersaving for a down payment:
• If your timeline is under 3 years, consider a conservative portfolio, or maybe a high-yield savings account.
• If you are looking at 3 to 5 years, consider a conservative or moderately conservative portfolio that can grow your money faster than a cash-based account.
• If closing day is 5 to 10 years in the future or more, consider a moderate or moderately aggressive investment portfolio that can yield higher returns in the long run.
Mortgage costs are increasing, with many potential homeowners being priced out of the market. But with planning, budgeting, and a solid savings plan, there are many roads to home ownership.
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